Friday, November 12, 2010

What Is Refinancing?

Refinancing is a way to save money and take advantage of
the low interest rates. Specifically it is the process of taking out a new
mortgage, and using the money to close out or pay off a current mortgage. If you
refinance with a lower interest rate you'll reduce your monthly mortgage payment
even if your new mortgage is for the same amount as your current mortgage.

Obtaining a new mortgage involves costs of its own. In deciding whether or not
to refinance you need to compare the savings of a lower monthly payment against
the costs of refinancing.

Traditionally, the rule-of-thumb that's cited is that the interest rate for your new mortgage should be about 2 percentage points below the rate of your current mortgage. With the new low-cost and no-cost refinancing programs, it may be worth your while to refinance and obtain a smaller reduction in interest rates.

Refinancing is a great way to get some cash out to do a complete renovation to your home. Folks will get refinancing right before they put the house up on sale on the market. One trend that is catching on is that folks will hire a home stager to increase the curb appeal of their home. A home stager will suggest tips on how to best fluff your house to get the best selling price.

Fluff enough and potential home buyers will imagine your house looks better than it really is. I have heard of real life stories where this bachelor hired a home stager and he got an extra $50 000 for the sale of his condo downtown.

Terms You Will Want To Know

Reasons To Refinance
1. Save money on interest rates. If you obtained your
current mortgage when interest rates were considerably higher than they are
now, then refinancing makes sense. With a lower interest rate your monthly
mortgage payment is reduced.

2. Convert an adjustable-rate mortgage (ARM) to a
fixed-rate mortgage. You have an ARM and your nerves can't take it any more.
If interest rates are low, you may decide to choose the predictable monthly
payments of a fixed-rate mortgage.

3. Convert an adjustable-rate mortgage (ARM) to an ARM
with more desirable features or lower rates. You want an adjustable-rate
mortgage that offers better protection than your current loan and offers
significant savings. Even though the interest rates on ARMs fluctuate
with prevailing market rates, you may have one that's tagged to higher
indices-and carries a higher interest rate-than other ARMs currently

4. Build up equity faster.
If your financial resources
have improved since you obtained your mortgage, you may want to convert to a
mortgage with a shorter term-perhaps a 15-year mortgage instead of a 30-year

5. Convert equity to cash.
If you've held your mortgage for a long time, you will have substantially
reduced the outstanding principal on your loan. This means you'll be able to
finance a considerably larger amount than you owe on your current mortgage.

6. Dollars & Sense

Home Equity Loan or (second Mortgage)

* fixed rate, generally tied to long-term interest rates.
* fixed repayment schedule, usually 10, 15 or 20 years
* higher rates than(heloc), in flexible repayment periods, entry fees
* lump sum of cash for one time need such as home remodeling, debt
consolidation, or cash out

Home equity line of credit (HELOC)

* Monthly Variable rate, usually tied to the prime rate
* Payments to immediately; borrowing can ast five to 10 years Followed by
* Interest rates can climb steeply within a few months; no cap adjustments
* Flexible or emergency borrowing to finance reoccurring expenses for education
or health care

Glossary in terms:

What is(ARM) Adjustable rate mortgage?

The interest rate adjusts monthly or every 3, 6,Or 12 months over a 30 year
term. The disadvantage here is that you need to watch out for interest rates
rising substantially an unexpectedly depending on the market conditions.

This type of rate Is suitable for home-buyers that would like to live in their home for a very short period of time, and can only pay the lowest possible Monthly payments. Don't forget if you are a new home buyer to learn how much you can save in interest by credit repair calculator and improve your credit score. As well, you will want to run a free credit report before getting quotes on home loans.

Source:Consumer Reports - May 2005

By: Rene Tse
Rene Tse has covered the fix credit and credit report repair industry for more than 6 years. Rene's work can also been seen in financial magazines.

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